Video: Tapping into Medicare's gold mine?

America spends over $500 billion every year so that elderly Medicare patients can get the care they need. But as health care costs rise, many are taking a closer look at what exactly we’re paying for. Our media partners at the Center for Investigative Reporting have been conducting a yearlong California Watch investigation into a prominent hospital chain that is reporting unusually high rates of serious diseases. Does the chain attract the toughest cases, or are the hospitals exaggerating conditions to pump up revenues from taxpayers? Reporter Lance Williams has the story.

Reporter: Doty’s job as a medical coder was to prepare summaries of patient illnesses for Medicare reimbursement. She says Reddy told doctors how to diagnose patients he had never seen.

Doty: There was several diagnoses that he was suggesting – highly recommending. They were told that they should look for those opportunities whenever possible.

Reporter: It turns out many diseases share similar symptoms. But more severe diseases are reimbursed by Medicare at higher rates.

Doty: He encouraged the physicians to stop documenting syncope, which is fainting or a dizzy spell, and instead use the term “autonomic nerve dysfunction,” which reimburses at a higher rate.

Reporter: Medicare pays about $7,000 to treat a patient who has fainted, even if there are other medical complications. But a patient with a nerve disorder and a major complication can net the hospital $12,500.

Doty: He made the comment that autonomic nerve dysfunction is such a vague description that no one could ever question the use of that code in the medical record.

Reporter: Doty says what ran through her mind was:

Doty: This is crazy, how can I get out of here?

Reporter: Doty’s co-worker Danika Fedeli was at the same meeting.

Danika Fedeli: With Dr. Reddy, it really just felt like he was coaching the doctors to say what he wanted them to say, and you're not allowed to do that.

Reporter: Prime insists their billings are accurate and legal, but they refused an on-camera interview.

In a yearlong investigation of millions of patient records, California Watch uncovered a pattern of suspicious diagnoses. State Medicare data for 2010 shows that out of 468 cases of autonomic nerve disorder, 360 were reported by Prime hospitals – 90 times more often than the average California hospital.

Dr. Geoffrey Sheean: Very surprising. And it rather does suggest that they're applying a very liberal definition or very liberal criteria to what they consider an autonomic nervous system disorder.

Reporter: Dr. Geoffrey Sheean is a leading nerve disorder specialist at the University of California in San Diego.

Sheean: I've only seen two cases in the last 13 years, where it would be appropriate to label a problem of a patient as an autonomic nervous system disorder. Extremely rare.

Reporter: And it wasn’t just a single disease. California Watch found that Prime hospitals reported unusually high rates of a long list of extremely serious medical conditions, from malignant hypertension to severe malnutrition.

We found one of the strangest examples in rural Shasta County, where Prime has reported a seeming outbreak of a rare disease called kwashiorkor, typically seen in children during famines. Our investigation led us to this Shasta County resident:

Darlene Courtois: I’ve never heard the word “kwashiorkor” before. I never heard a doctor, nurse or any other medical personnel tell me that I had kwashiorkor.

Reporter: When Darlene Courtois went to the emergency room at Shasta Regional Medical Center in early 2010, she was seeking treatment for complications from diabetes.

Courtois: My kidneys weren’t functioning well, and I was retaining fluid and it was causing fluid to build up around my heart, making it hard to breathe.

Reporter: With Courtois’ permission, we obtained her hospital records and, through the Freedom of Information Act, her Medicare bill, where we found this number: 260, the code for kwashiorkor.

Courtois: I have no idea how that could have happened. I mean, it’s obvious just looking at me that I don’t qualify for that.

Reporter: But Vicki Presley Smith says personnel were under intense pressure to document certain ailments. She worked as a coder at Prime’s Desert Valley Hospital and says just one word on a patient’s medical record can make an enormous difference.

Vicki Presley Smith: The word “protein malnutrition.” So that is the word that they wanted the doctor to basically put in their progress notes.

Reporter: Moderate malnutrition is assigned the code 263. But use the term “protein malnutrition,” and the industry-standard billing software points to the code 260, or kwashiorkor. And do doctors realize that this is happening? Probably not, says Smith.

Smith: Kwashiorkor is never brought to their attention. The word “protein malnutrition” is brought to their attention, so they just write down that terminology.

Reporter: State records show that reports of kwashiorkor at the Shasta County hospital began soaring after Prime bought the hospital in 2008.

Pietro Ingrande: We're talking about millions of dollars.

Reporter: Pietro Ingrande owns a medical coding company. He canceled his contract with Prime over professional differences.

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Ingrande: There are 14 hospitals in Prime Healthcare. If this level of inappropriate documentation is going on, that could be as much as $100 million, if it were true.

Reporter: Still, it’s hard to determine how Courtois got caught in this trend. She says she’s overweight, and one ER doctor called her “well-nourished.”

Courtois: I couldn’t believe it. It doesn’t seem possible they could use some kind of a code for a disease I don’t have – and obviously don’t have.

Jamie Bennett: It’s a huge problem. There is a substantial amount of waste in the Medicare program; a lot of it comes from fraud.

Reporter: Former federal prosecutor Jamie Bennett investigated a case against a Baltimore hospital accused of falsely diagnosing kwashiorkor. She says a change in Medicare reimbursement rules is being exploited by some hospitals.

Bennett: What we quickly found is that they responded to it by significantly increasing the use of diagnoses that, by coincidence, would really increase the reimbursement to the hospitals, and not in a way that was legitimate.

Reporter: With recent cases of alleged Medicare fraud in Tennessee, Maryland and Texas, Bennett estimates nearly 20 percent of Medicare costs are due to fraud.

Bennett: We're talking about billions and billions of dollars of fraud that isn't uncovered.

Reporter: Back in California, two insurers, Kaiser Permanente and Heritage, have filedlawsuits accusing Prime of exaggerating patient conditions and “fraudulent billing practices.” Prime has denied the allegations.

In a detailed written statement, Prime’s spokesman wrote, “Codes are not the actual definitions of the diseases, and they are not error proof.” He wrote that Prime follows Medicare’s guidelines, although they’re imprecise. A Medicare spokeswoman declined to comment.

But Anneke Doty felt it was time to quit the company earlier this year.

Doty: I was thinking about was whether or not some governmental agency would be walking through the door and handcuffing us all and subpoenaing records and carrying them out in boxes.

Anchor: A few weeks ago, Prime Healthcare Services added a 15th hospital to its network with the purchase of ownership interests in Harlingen Medical Center in Texas. With efforts under way to acquire hospitals in New Jersey and Hawaii, the company continues to grow. For more on this story, go to the Center for Investigative Reporting’s website, cironline.org.